<LOGO>
TAX-FREE FUND OF COLORADO
ANNUAL REPORT
"BACK TO BASICS"
January 31, 1996
Dear Investor:
OBSERVATIONS ABOUT 1995
The year 1995 was an extraordinary one in the securities market.
As measured by various popular indexes, the stock market produced
what would be considered "once in a lifetime" returns.
The dazzle of spectacular price increases among common stocks in 1995
attracted the attention and participation of many investors. With stock
price gains generally of the magnitude of 25% or more in a year, we can see
why.
Although bond prices, including those of municipal securities,
also experienced considerable gains, these were distinctly overshadowed by
what happened in the stock markets.
Consequently, with all the stock price excitement, many investors
were distracted from their longer-term financial planning goals. As we all
know - but sometimes forget - things do not continuously grow to the sky.
A NEW YEAR
Here we are at the beginning of another year - 1996. Accordingly, it
is well to consider the risk/reward characteristics of one's investments in
light of longer-term investment goals and what might occur in this calendar
year.
Few people, including ourselves, are very good at crystal ball gazing
with the securities markets. Nevertheless, we still would hazard an
opinion that the magnitude of positive returns experienced in the stock
markets in 1995 will NOT be repeated in 1996.
As a result, we feel it prudent that all investors, including all
current shareholders of the Fund, think seriously about the orientation of
their investment Fund's. One should think about what might be the desirable
risk/reward relationship of one's assets this year, as such orientation or
allocation suits one's longer-term investment goals and objectives.
1
<PAGE>
BACK TO BASICS
It is always important to remember that stocks and bonds are
entirely different types of investments. They are appropriate for different
type investment objectives.
Stocks are attractive for capital growth prospects while bonds are
primarily used for capital preservation - and, for tax-free income in the
case of municipal bonds. Individual equity securities can appreciate in
value significantly during one time period and then, when a disappointing
earnings report comes out, can just as easily drop in price by 20% - 30% IN
JUST ONE DAY in the highly volatile marketplace that currently exists.
Municipal bonds, on the other hand, generally don't fluctuate in
price very significantly, unless they have long maturities or are of low
quality. They just plod along from year to year, producing a relatively high
level of capital preservation and a consistent and relatively decent level of
tax-free annual income return.
Moreover, with the relatively high level of credit safety that is
inherent to municipal securities, this kind of investment gives you a comfort
level you can count on in terms of protection of your investment and
consistency of income stream, particularly over the longer-term time span in
which your investment should be viewed.
Therefore, with those investors having as a key investment goal
the preservation of capital and a consistent monthly income stream, Tax-Free
Fund of Colorado could well be the investment vehicle that could serve one
best.
WHERE THE FUND NOW STANDS
QUALITY OF PORTFOLIO
Quality is the most important ingredient in providing the means to
protect investment capital.
That is why the investment portfolio of Tax-Free Fund of Colorado
has been constructed with such a high quality orientation. Of the nine
separate credit ratings assignable to municipal securities by the nationally
renown credit rating services, we only invest in the top four ratings.
It is worth emphasizing that at December 31, 1995, 99.2% of the
Fund's assets were ranked in the top three ratings - AAA, AA, AND A.
Moreover, 87.1% of the assets were in the top two ratings, AAA and AA, as you
will note from the accompanying chart.
This represents EXCEPTIONALLY high quality standards. Consequently, the
level of capital preservation offered to the Fund's shareholders is of the
highest order.
<TABLE>
<CAPTION>
PORTFOLIO DISTRIBUTION BY QUALITY
<S> <C>
AAA 65.2%
A 12.1%
BELOW A 0.8%
AA 21.9%
</TABLE>
2
<PAGE>
Moreover, the Fund's Investment Adviser, KPM Investment Management,
Inc., a Mutual of Omaha company, is constantly reviewing each and every
security in the portfolio as to its creditworthiness. We want shareholders
to have the comfort of "SLEEPING WELL AT NIGHT" knowing that someone is
paying close attention to the quality orientation of their investment in the
Fund.
SHARE PRICE STABILITY
In viewing the value of one's investment in the Fund, it is
essential that regard be given to a reasonable time span.
Unless one limits the maturity of fixed-income securities to one year
or less, there will always be fluctuations in price as market conditions
vary.
A key goal that management has is to provide shareholders with a
high level of share price stability over a reasonable time period.
The accompanying chart illustrates the performance of the Fund's share
price since inception on May 22, 1987.
<TABLE>
<CAPTION>
SHARE NET ASSET VALUE
<S> <C>
6/30/87 9.640
12/31/87 9.510
6/30/88 9.660
12/30/88 9.660
6/30/89 9.790
12/31/89 9.800
6/30/90 9.730
12/31/90 9.770
6/30/91 9.840
12/31/91 10.180
6/30/92 10.260
12/31/92 10.380
6/30/93 10.750
12/31/93 10.770
6/30/94 10.130
12/31/94 9.820
6/30/95 10.280
12/31/95 10.560
</TABLE>
We believe this goal of share price stability has been achieved
quite well over the years.
In accomplishing this goal, the quality composition of the
investment portfolio is an important element.
Also, however, the maturity structure of the portfolio is a key
ingredient. The Fund presently holds securities with very short maturities,
but also some with quite long maturities. However, the average maturity at
year-end 1995 was 9.7 years. This helps contain fluctuations in share price
- - up or down - to a modest nature.
3
<PAGE>
Another factor in creating share price stability is diversification -
diversification by number of issues, by numerous municipal issuers, by
nature of projects financed and by geographic location within Colorado. The
diversification employed by the Fund encompasses all these elements. At
December 31, 1995, there were 147 separate securities in the investment
portfolio.
RATE OF RETURN
We consistently try to provide shareholders with a good level of DOUBLE
TAX-FREE income - as high as possible commensurate with the degree of
capital preservation we strive to achieve.
The accompanying chart shows the average level of DOUBLE TAX-FREE
income distributed to shareholders over the past fiscal year, as measured
against the maximum public offering price.
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO'S DOUBLE TAX-FREE DISTRIBUTION
RATE AS COMPARED TO THE TAXABLE EQUIVALENT RATE AN
INVESTOR WOULD HAVE TO EARN AT VARIOUS TAX BRACKETS
<S> <C> <C> <C> <C>
TAX BRACKET 28% 31% 36% 39.6%
TAXABLE EQUIVALENT RATE 7.32% 7.75% 8.38% 8.91%
DOUBLE TAX-FREE DISTRIBUTION RATE 5.01% 5.01% 5.01% 5.01%
</TABLE>
Since shareholders are subject to the payment of income tax at
Federal tax levels as well as payment of State of Colorado income tax, we
have also shown in this chart the rate of taxable income return one would
have had to earn over the course of the year in order to equate to the DOUBLE
TAX-FREE income return generated by the Fund.
No matter which Federal income tax bracket applies, you can readily see
that there is quite a difference between the taxable and the DOUBLE TAX-FREE
return levels.
It is important to note that it would not have been possible over the
past 12-month period to find taxable fixed-income investments that would
produce the same level of after tax return as that of the Fund, unless one
settled for a lesser quality and higher risk taxable investment.
4
<PAGE>
SIZE OF FUND'S ASSETS
We are pleased to report that at December 31, 1995, the total net
asset size of Tax-Free Fund of Colorado was $219,305,807. This compares with
the level of $199,075,408 at the same date a year earlier.
Such asset size helps keep the Fund's expense ratio for its operations
significantly below the industry average for similar-type municipal bond
Fund's.
OUR APPRECIATION
We thank all shareholders for their continued loyalty and for the
confidence placed in the management of Tax-Free Fund of Colorado.
You can be assured that we will constantly try our best to merit
your continuing support.
Sincerely,
/s/ Lacy B. Herrmann
Lacy B. Herrmann
President and Chairman
of the Board of Trustees
5
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE
The graph below illustrates the value of an initial $10,000 investment
in Tax-Free Fund of Colorado at inception of the Fund in May, 1987 and
subsequently through the Fund's latest fiscal year end, December 31, 1995, as
compared with a hypothetical similar size investment in the Lehman Brothers
Municipal Bond Index (the Index) of municipal securities over that same
period. The total return of the Fund is shown after deduction of the maximum
sales charge of 4% at the time of initial investment, and also reflects
deduction of the Fund's annual operating expenses and reinvestment of monthly
dividends and capital gains distributions without sales charge. On the other
hand, the Index does not reflect any sales charge nor operating expenses but
does reflect reinvestment of coupons.
It should also be specifically noted that the Index is nationally
oriented and consisted, over the period covered by the graph, of an unmanaged
mix of between 8,000 to 27,000 investment-grade long-term municipal
securities of issuers throughout the United States. However, the Fund's
investment portfolio consisted of a significantly lesser number of
investment-grade tax-free municipal obligations, principally of Colorado
issuers, over the same period. The maturities, market prices, and behavior of
the individual securities in the Fund's investment portfolio can be affected
by local and regional factors which might well result in variances from the
market action of the securities in the Index.
Consequently, much of the difference in performance of the Index versus
the Fund can be attributed to the lack of application of annual operating
expenses and initial sales charge to the Index. Additionally, a portion of
the difference in performance can be attributed to the different
characteristics in the single-state market of the securities in the Fund's
portfolio as compared with the national orientation of the securities in the
Index.
Since its inception, the Fund has been managed to provide as stable a
share value as possible consistent with producing a competitive income return
to shareholders. It has not been managed for maximum total return, since one
of the aims of management in structuring the portfolio of the Fund is to
reduce fluctuations in the price of the Fund's shares resulting from changes
in interest rates.
As can be observed, however, the pattern of the Fund's results and
that of the Index over the period since inception of the Fund track quite
similarly, even though they are not entirely comparable in character.
PERFORMANCE COMPARISON
<TABLE>
<CAPTION>
FUND'S AVERAGE ANNUAL TOTAL RETURN
<S> <C> <C> <C>
FOR THE PERIOD ENDED 1 YEAR 5 YEARS LIFE OF FUND
DECEMBER 31, 1995 SINCE 5/21/87
INCLUDING SALES 8.74% 7.04% 7.11%
CHARGES AND EXPENSES
</TABLE>
<TABLE>
<CAPTION>
LEHMAN BROTHERS FUND AFTER SALES
PERIOD ENDING MUNICIPAL BOND INDEX CHARGE AND EXPENSES
<S> <C> <C>
MAY 87 $10000 $9600
DEC 87 $10500 $9800
DEC 88 $11500 $10750
DEC 89 $12750 $11600
DEC 90 $13800 $12350
DEC 91 $15500 $13600
DEC 92 $16800 $15000
DEC 93 $18900 $16600
DEC 94 $17844 $15959
DEC 95 $20960 $18078
</TABLE>
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE RESULTS
6
<PAGE>
MANAGEMENT DISCUSSION OF FUND PERFORMANCE (continued)
1995 REVIEW
The performance of the fixed-income markets in 1995 proved to be a
mirror image of 1994. Just as 1994 was marked by sharply rising rates, 1995
saw significant declines in interest rates as investors anticipated a plan
for a balanced budget and slower economic growth. The yield on 10-year AAA
municipal bonds declined from about 6.00% in 1994 to 4.80% in December of
1995. This resulted in a 13.3% total return for the Tax-Free Fund of
Colorado. Despite the very respectable returns in the municipal market, they
still lagged returns available in the taxable fixed-income market due to
concerns about the potential effect of tax reform on municipals. This has
created a situation where the taxable equivalent yields for municipal bonds
are extremely favorable versus what can be obtained in the taxable market.
At present, a 5.0% double tax-free yield on a Colorado bond is
equivalent to a 7.63% taxable return for a married Colorado investor in the
31% Federal tax bracket.
The supply of new issues of Colorado municipals remained fairly steady
throughout the year. The quality of issuance also continued to be very good.
During the year, the Fund pursued a strategy of selling positions in longer
maturity, lower coupon bonds into market strength and replacing them with
shorter maturities with higher yields. At the end of the year, the Tax-Free
Fund of Colorado had an average maturity of 9.7 years, an average coupon rate
of 6.2%, and a quality rating of AA+. These characteristics will reduce
interest rate risk, generate an above-average income yield, and provide a
stable share price with minimal credit risk.
1996 STRATEGY
It should come as no surprise to our long-time shareholders that we
plan to continue our conservative strategy for 1996. The portfolio is
designed to perform well in stable or rising interest rate environments. In
addition, our Colorado-based Investment Adviser will continue to take
advantage of its location to monitor very closely the issuers in which we
have made investments. We continue to believe that, over the long run, our
defensive investment posture and thorough credit analysis will achieve
consistent, above average risk-adjusted rates of return.
7
<PAGE>
<LOGO>
KPMG PEAT MARWICK LLP
Certified Public Accountants
INDEPENDENT AUDITORS REPORT
To the Board of Trustees and Shareholders of
Tax-Free Fund of Colorado:
We have audited the accompanying statement of assets and liabilities of
Tax-Free Fund of Colorado, including the statement of investments, as of
December 31, 1995, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the
years in the five-year period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1995, by correspondence with the
custodian. An audit also includes assessing the accounting principles used,
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Tax-Free Fund of Colorado as of December 31, 1995, the results of
its operations for the year then ended, the changes in its net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the five-year period then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
New York, New York
February 2, 1996
8
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
DECEMBER 31, 1995
RATING
FACE MOODYS/
AMOUNT GENERAL OBLIGATION BONDS (36.6%) S&P VALUE
<C> <S> <C> <C>
School Districts (17.4%)
$ 1,000,000 Adams County School District #1 Aaa/AAA $ 1,127,500
6.50%, 12/01/07, FGIC Insured
2,500,000 Adams County School District #12 Aaa/AAA 2,687,500
6.20%, 12/15/09, FGIC Insured
2,000,000 Adams County School District #12 Aaa/AAA 2,270,000
7.30%, 12/15/07, FGIC Insured
1,500,000 Arapahoe County, Cherry Creek School
District #5 Aa/AA 1,685,625
7.00%, 12/15/03
2,000,000 Boulder, Larimer & Weld County, St.
Vrain Valley School District #RE-1J
Series 1990 Aaa/AAA 2,135,000
5.70%, 12/15/06, MBIA Insured
775,000 Boulder, Larimer & Weld County, St.
Vrain Valley School District #RE-1J
Series 1990 Aaa/AAA 859,281
7.00%, 12/15/99, MBIA Insured
225,000 Boulder, Larimer & Weld County, St.
Vrain Valley School District #RE-1J
Series 1990 Aaa/AAA 247,219
7.00%, 12/15/05, MBIA Insured
1,500,000 Denver City & County School District #1 Aaa/AAA 1,657,500
6.10%, 12/15/02, MBIA Insured
1,000,000 Douglas & Elbert Counties School
District #RE-1 Refunding Series
1991B Aaa/AAA 1,096,250
6.70%, 12/15/06, FGIC Insured
1,000,000 Douglas & Elbert Counties School
District # Re-1, Series 1992 Aaa/AAA 1,060,000
5.75%, 12/15/05, FGIC Insured
2,500,000 Douglas & Elbert Counties School
District # Re-1, Series 1992 Aaa/AAA 2,718,750
6.15%, 12/15/08, MBIA Insured
1,500,000 Eagle County School District #RE50J Aaa/AAA 1,616,250
6.95%, 12/01/03, FGIC Insured
2,320,000 Eagle County School District #RE50J,
Series 1999 Aaa/AAA 2,575,200
6.15%, 12/01/04, FGIC Insured
400,000 El Paso County School District #20 Aaa/AAA 426,500
8.00%, 12/01/06, MBIA Insured
1,600,000 Jefferson County School District # R-1 Aaa/AAA 1,722,000
6.00%, 12/15/06, AMBAC Insured
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 4,000,000 Jefferson County, School District, #R-001 Aaa/AAA $ 4,280,000
6.00%, 12/15/07, AMBAC Insured
1,045,000 Pitkin County Colorado School District #1
(ASPEN) Aaa/AAA 1,142,969
5.85%, 11/15/03, AMBAC Insured
1,790,000 Pitkin County, Aspen School District #1
Series 1989 Aaa/AAA 1,946,625
5.95%, 11/15/05, AMBAC Insured
1,000,000 Poudre Valley School District # R-1,
General Obligation Refunding Aaa/AAA 1,066,250
6.15%, 12/15/08, AMBAC Insured
1,500,000 Poudre Valley School District # R-1,
General Obligation Refunding Aaa/AAA 1,546,875
5.40%, 12/15/04, AMBAC Insured
1,030,000 Pueblo County School District # 070,
Pueblo Rural Series B Aaa/AAA 1,050,600
5.375%, 12/01/08, MBIA Insured
1,050,000 Summit County School District, Series A Aaa/AAA 1,103,812
5.40%, 12/01/06, FGIC Insured
2,000,000 Thompson School District # RJ-2,
General Obligation Refunding NR/A 2,132,500
5.90%, 12/15/05, AMBAC Insured
38,154,206
City & County (8.4%)
500,000 Boulder County Open Space Acquisition Aaa/AA 546,250
6.90%, 08/15/04
1,000,000 Denver City & County Refunding-Water Aa/AA 1,052,500
5.85%, 09/01/07
3,000,000 Denver Colorado City & County Series C Aa/AA 3,112,500
5.75%, 08/01/07
500,000 Denver Colorado City & County Unlimited
Tax, Aa/AA 556,875
6.90%, 08/01/02
1,000,000 Denver Colorado City & County Unlimited
Tax, Aa/AA 1,113,750
7.00%, 08/01/03
1,785,000 Fort Collins, Refunding Aa/AA 1,912,181
6.05%, 12/01/07
750,000 Greeley Water & Improvement Refunding A1/AA- 815,625
7.50%, 08/01/98
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 500,000 Louisville, CO Water Refunding Aaa/AAA $ 536,250
7.10%, 12/01/02, FGIC Insured
1,085,000 Snowmass Refunding Aaa/AAA 1,200,281
6.95%,11/15/05, FSA Insured
4,000,000 Thornton, CO Refunding Aaa/AAA 4,340,000
6.00%, 12/01/05, FGIC Insured
2,000,000 Thornton, CO, Refunding-Spur A Aaa/AAA 2,162,500
6.05%, 12/01/06, FGIC Insured
1,000,000 Westminster Colorado Water Series 1992 A A1/AA- 1,065,000
6.25%, 12/01/07
18,413,712
Metropolitan District (5.6%)
1,000,000 Beaver Creek Metro District Eagle County
Refunding Aaa/AAA 1,047,500
7.125%, 12/01/01, MBIA Insured
2,500,000 Boulder Colorado Central Area Improvement Aaa/AAA 2,650,000
6.30%, 08/15/07, FGIC Insured
3,000,000 Highlands Ranch Metropolitan District #2 Aa1/AAA 3,078,750
6.70%, 06/15/01, Swiss Bancorp Insured
1,530,000 Highlands Ranch Metropolitan District #1,
Refunding Aaa/AAA 1,648,575
6.25%, 09/01/06, MBIA Insured
1,500,000 Meridian Metropolitan District A3/NR 1,571,250
7.00%, 12/01/99
1,000,000 Westglenn Metropolitan District Colorado, NR/A+ 1,068,750
6.25%, 12/01/08
1,260,000 Westglenn Metropolitan District Colorado
Jefferson County Refunding, NR/A+ 1,340,325
5.65%, 12/01/04
12,405,150
Water & Sewer (3.9%)
1,750,000 Centennial Water & Sewer District Aa1/AAA 1,883,438
5.80%, 12/01/07
1,220,000 Inverness Water & Sanitation District
Colorado Arapahoe & Douglas
Counties Refunding, Aaa/AAA 1,335,900
6.30%, 12/01/05, MBIA Insured
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT GENERAL OBLIGATION BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 3,000,000 Northglenn Colorado General Obligation
Water & Utility Revenue Aaa/AAA $ 3,153,750
5.50%, 12/01/06, FSA Insured
1,000,000 Southgate Colorado Water District
Arapahoe & Douglas Counties Aaa/AAA 1,068,750
7.05%, 12/01/01, FGIC Insured
1,000,000 Southgate Colorado Water District
Arapahoe & Douglas Counties Aaa/AAA 1,073,750
7.20%, 12/01/05, FGIC Insured
8,515,588
Hospital (1.3%)
750,000 Poudre Valley Colorado Hospital District Aa/AA- 810,000
6.75%, 11/15/98
2,000,000 Poudre Valley Hospital District, Refunding Aa/AA- 2,050,000
5.375%, 11/15/07
2,860,000
Total General Obligation Bonds 80,348,656
REVENUE BONDS (62.2%)
Higher Education (12.1%)
1,000,000 Aurora Educational Development Community
College Series 1990 Aaa/AAA 1,110,000
7.10%, 04/01/00, MBIA Insured
1,000,000 Aurora Educational Development Revenue
Bonds Aaa/AAA 1,115,000
7.25%, 04/01/00 MBIA Insured
1,580,000 City of Aurora Colorado Educational
Development Refunding Bonds Series 1994 NR/BBB 1,653,075
6.00%, 10/15/07
1,000,000 Colorado Post Secondary Educational
Facility, Regis University Project NR/AAA 1,068,750
6.35%, 06/01/05, Connie Lee Insured
1,235,000 Colorado Post Secondary Educational
Facility, Regis University Project NR/AAA 1,321,450
6.30%, 03/01/07, Connie Lee Insured
1,000,000 Colorado Post Secondary Educational
Facilities Authority Refunding
Revenue Bonds Series 93, NR/AAA 1,048,750
5.95%, 03/01/09
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 1,000,000 Colorado State Board of Agriculture
Revenue, Fort Lewis College Aaa/AAA $ 1,096,250
6.50%, 10/01/06, FGIC Insured
1,000,000 Colorado State Board of Agriculture
Revenue, University of Southern
Colorado Auxiliary Facility Aaa/AAA 1,075,000
6.25%, 08/01/07, AMBAC Insured
1,000,000 Colorado State Board of Agriculture
Revenue Refunding & Improvement Aaa/AAA 1,077,500
6.35%, 03/01/08, MBIA Insured
1,000,000 Colorado State Board of Agriculture
Revenue Refunding, Colorado State
University Student Sports, Aaa/AAA 1,040,000
5.40%, 04/01/06, MBIA Insured
1,000,000 Colorado State Board of Agriculture
Revenue Refunding, Colorado State
University Student Sports, Aaa/AAA 1,021,250
5.45%, 04/01/08, MBIA Insured
2,655,000 Board of Trustees State Colleges
Colorado Auxiliary Facilities System
Revenue Bonds (Western State Colleges
Project) NR/AAA 3,006,787
6.60%, 05/01/08
1,375,000 Board of Trustees State Colleges
Colorado Auxiliary Facilities System Aaa/AAA 1,435,156
5.35%, 05/15/06, MBIA Insured
1,500,000 Colorado Student Obligation Board
Authority Student Loan Revenue A/NR 1,569,375
6.00%, 09/01/01, MBIA Insured
1,860,000 Colorado State Colleges Western State, Aaa/AAA 1,922,775
5.50%, 05/15/09, MBIA Insured
1,000,000 Larimer County, Colorado State
University Research Fund Aaa/AAA 1,041,250
7.00%, 04/01/03, BIGI Insured
420,000 University of Colorado, Student
Recreation Center Aaa/AAA 458,850
7.00%, 06/01/99, MBIA Insured
500,000 University of Colorado Regents Research
Building Revolving Fund Revenue NR/A+ 540,625
6.85%, 06/01/03
320,000 University of Colorado Revenue Aaa/AAA 356,800
7.10%, 06/01/02, MBIA Insured
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 1,000,000 University of Colorado Research
Building Revenue Aaa/AAA $ 1,070,000
6.00%, 06/06/06, MBIA Insured
1,000,000 University of Colorado Revenue Aaa/AAA 1,075,000
6.20%, 06/01/07, MBIA Insured
1,500,000 State of Colorado University of Northern
Colorado Auxiliary Facilities Aaa/AAA 1,591,875
5.75%, 06/01/07, MBIA Insured
26,695,518
Electric (8.9%)
8,000,000 Adams County Colorado Pollution Control
Revenue Public Service Aaa/AAA 8,280,000
5.625%, 04/01/08, MBIA Insured
2,000,000 Colorado Springs Utility Revenue Series
1991 A Aa/AA 2,262,500
6.75%, 11/15/05
2,125,000 Moffat County Colorado Pollution
Control Revenue Aaa/AAA 2,228,594
5.625%, 11/01/06, AMBAC Insured
3,000,000 Platte River Power Authority Aa/A+ 3,168,750
6.75%, 06/01/07
2,000,000 Platte River Power Authority Aa/A+ 2,172,500
6.00%, 06/01/06
1,315,000 Platte River Power Authority Power
Revenue Series BB Aa/A+ 1,410,338
6.125%, 06/01/09
19,522,682
Sales Tax (7.2%)
1,000,000 Arvada Colorado Sales & Use Tax Revenue Aaa/AAA 1,062,500
6.10%, 12/01/07, FGIC Insured
2,000,000 Boulder County Colorado Open Space & Use
Tax Revenue Bonds Series 1994 Aaa/AAA 2,137,500
5.75%, 12/15/04, FGIC Insured
1,095,000 Castle Rock Sales & Use Tax Revenue Aaa/AAA 1,133,325
6.85%, 06/01/00, MBIA Insured
500,000 Denver City & County Excise Tax Aaa/AAA 546,875
6.90%, 09/01/00, MBIA Insured
1,000,000 Denver Metro Major League Baseball
Stadium Excise Tax Revenue Aaa/AAA 1,108,750
6.35%, 10/01/03, FGIC Insured
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 2,000,000 Denver Metro Major League Baseball
Stadium Excise Tax Revenue Aaa/AAA $ 2,227,500
6.45%, 10/01/04, FGIC Insured
1,000,000 Fort Collins Downtown Development
Authority Tax Increment Revenue Aaa/AAA 1,078,750
6.50%, 06/01/07, MBIA Insured
2,045,000 Fort Collins Sales & Use Tax Revenue Aaa/AAA 2,121,687
5.375%, 12/01/06, FGIC Insured
1,000,000 Jefferson County Districtwide Sales Tax Aaa/AAA 1,076,250
6.10%, 12/01/04, MBIA Insured
500,000 Mesa County Sales Tax Revenue Aaa/AAA 542,500
7.40%, 06/01/00, MBIA Insured
500,000 Thornton Sales & Use Tax Revenue Aaa/AAA 545,000
6.70%, 09/01/99, FGIC Insured
1,000,000 Thornton Sales & Use Tax Revenue Aaa/AAA 1,083,750
6.80%, 09/01/01, FGIC Insured
1,000,000 Westminster Sales & Use Tax 1991 Aaa/AAA 1,108,750
6.70%, 12/01/01, FGIC Insured
15,773,137
Water & Sewer (8.6%)
1,000,000 Colorado Water Resource & Power
Development Authority, Series A Aa/AA 1,137,500
6.90%, 09/01/04
1,000,000 Colorado Water Resource & Power
Development Authority, Series A Aa/AA 1,142,500
7.00%, 09/01/05
1,000,000 Colorado Water Resource & Power
Development Authority, Clean Water
Revenue, Aa/AA 1,052,500
5.35%, 09/01/06
1,000,000 Colorado Water Resource & Power
Development Authority, Series A Aa/AA 1,142,500
7.00%, 09/01/06
500,000 Colorado Water Resource & Power
Development Authority, Series B Aa/AA+ 570,625
6.875%, 09/01/05
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 500,000 Colorado Water Resource & Power
Development Authority, Aaa/AAA $ 561,250
7.00%, 11/01/00
1,000,000 Colorado Water Resource & Power
Development Authority Aaa/AAA 1,103,750
6.80%, 11/01/05, FGIC Insured
1,000,000 Colorado Water Resource & Power
Development Authority Aaa/AAA 1,102,500
6.50%, 11/01/05, FGIC Insured
1,000,000 Colorado Water Resource & Power
Development Authority Aa/AA 1,087,500
6.00%, 09/01/06
1,100,000 Colorado Water Resource & Power
Development Authority Aaa/AAA 1,138,500
5.45%, 11/01/07, FGIC Insured
900,000 Fort Collins Sewer Revenue Aaa/AAA 945,324
7.45%, 12/01/99, FGIC Insured
1,965,000 Fort Collins Colorado Wastewater Sewer
Revenue Aaa/AAA 2,011,669
5.375%, 12/01/08, FGIC Insured
1,000,000 Loveland Sewer Revenue Series 1989 Aaa/AAA 1,083,750
6.80%, 11/01/01, MBIA Insured
1,000,000 Metro Wastewater Reclaimation District,
Gross Revenue Series A1/AA 1,067,500
5.70%, 04/01/05
1,055,000 Metro Wastewater Reclaimation District,
Gross Revenue Series A1/AA 1,123,575
5.80%, 04/01/06
1,500,000 Parker Water and Sanitation District
Revenue Refunding Aaa/AAA 1,599,375
6.10%, 10/01/07, FGIC Insured
1,000,000 Westminster Colorado Water & Wastewater
Utility Enterprise-Water And Wastewater
Revenue Series 1994 Aaa/AAA 1,070,000
5.70%, 12/01/04, AMBAC Insured
18,940,318
Hospital (5.7%)
2,255,000 Colorado Health Facility Community
Provider Pooled Loan Revenue Aaa/AAA 2,559,425
7.20%, 07/15/05, CGIC Insured
1,000,000 Colorado Health Facility Community
Provider Pooled Loan Program Aaa/AAA 1,011,060
7.40%, 07/15/99, MBIA Insured
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 1,000,000 Colorado Health Facility Authority
Sisters of Charity Health Care Aaa/AAA $ 1,116,250
6.25%, 05/15/09, AMBAC Insured
2,030,000 Colorado Health Facility Authority
Hospital Revenue North Colorado
Medical Center Aaa/AAA 2,177,175
5.60%, 05/15/05, MBIA Insured
1,410,000 Colorado Health Facility Authority
Hospital Revenue Boulder Community
Hospital Aaa/AAA 1,505,175
5.65%, 10/01/06, MBIA Insured
1,460,000 City of Colorado Springs Hospital
Revenue Bonds Memorial Hospital Aaa/AAA 1,543,950
5.50%, 12/15/06, MBIA Insured
300,000 Denver City & County Revenue Refunding
for St. Anthony's Hospital Series 1988 Aaa/AAA 330,000
7.10%, 05/01/00, MBIA Insured
1,000,000 Poudre Valley Hospital District Aaa/AAA 1,118,750
6.50%, 12/01/01
1,000,000 Pueblo Hospital Revenue Refunding,
Parkview Hospital Series A Aaa/AAA 1,102,500
6.80%, 09/01/05, MBIA Insured
12,464,285
Housing (10.8%)
1,600,000 Adams County Colorado Multi-Family
Housing Revenue, Brittany Station
Series A, NR/AAA 1,658,000
5.400%, 09/01/05
1,950,000 Boulder County Multi-Family Housing,
Bridgewalk Project L.O.C., First
Banks N.A. NR/A 1,952,145
7.125%, 08/01/99, First Bank of
Minnesota Insured
1,035,000 City of Arvada Colorado Multi-family
Housing Revenue, Springwood GNMA NR/AAA 1,062,169
5.60%, 08/20/08
770,000 Colorado Housing Finance Authority
1991, Series A NR/A 824,863
6.90%, 05/01/01
330,000 Colorado Housing Finance Authority
1991, Series A-3 NR/AA 346,500
6.10%, 11/01/00
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
$ 325,000 Colorado Housing Finance Authority
1991, Series A-1 NR/AA $ 344,093
6.20%, 11/01/01
1,575,000 Colorado Housing Finance Authority,
SFM Series A-2 NR/AA 1,695,094
6.65%, 11/01/06
1,080,000 Colorado Housing Finance Authority,
SFM Series A NR/A 1,066,500
5.30%, 06/01/11
1,230,000 Colorado Housing Finance Authority,
SFM Series 1994C Aa/NR 1,296,112
6.00%, 12/01/04
2,000,000 Colorado Housing Finance Authority,
SFM Series D-2 Aa/NR 2,027,500
5.625%, 12/01/10
2,895,000 Colorado Housing Finance Authority,
SFM Series 1994C Aa/NR 3,065,081
6.25%, 12/01/12
525,000 Commerce City Single Family Revenue
Series A A/NR 557,156
6.875%, 03/01/12
1,000,000 Littleton Assisted Living Building
Authority, Amity Plaza Project
Multifamily Housing Revenue Bond
Series 1994 NR/A+ 1,057,500
6.10%, 03/01/06
1,500,000 Snowmass Village Multi-family Revenue
Refunding Aaa/AAA 1,597,500
6.30%, 12/15/08
535,000 Southwestern Colorado Single Family
Revenue Partnership, Refunding A/NR 569,775
7.10%, 09/01/04
280,000 Summit County SFM Revenue Refunding
Series A A/NR 295,050
7.25%, 12/01/04
4,145,000 Westminster Colorado Multi-Family Revenue
Refunding NR/AAA 4,238,263
5.35%, 12/01/25
23,653,301
Industrial Development Revenue (3.6%)
4,750,000 Boulder County Industrial Development
Revenue Refunding NR/A 5,106,250
May Department Stores Company Project
6.25%, 09/01/07
795,000 Denver City & County Industrial
Development Revenue NR/A 835,744
6.40%, 12/01/10
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
Industrial Development Revenue (continued)
$ 1,860,000 Denver City & County, Industrial
Development Revenue, Rollie R.
Kelley Project NR/A $ 1,973,925
7.00%, 06/01/06
7,915,919
Transportation (1.8%)
1,000,000 Arapahoe County Colorado E-470 Vehicle
Registration Revenue Bonds Aaa/AAA 1,055,000
5.45%, 08/31/07
1,550,000 Regional Transportation District Sales
Tax Revenue A1/AA- 1,710,812
6.05%, 11/01/04
1,000,000 Regional Transportation District Sales
Tax Revenue Aaa/AAA 1,086,250
6.15%,11/01/05, FGIC Insured
3,852,062
Lease (2.5%)
600,000 Arapahoe Library District, Adams &
Arapahoe Counties COP Aaa/AAA 666,750
7.00%, 12/15/02, FGIC Insured
1,535,000 City Of Aspen Colorado Lease Purchase
Revenue, COP Aaa/AAA 1,582,969
5.25%, 09/01/06, MBIA Insured
405,000 Boulder Municipal Property Authority
Lease Purchase Revenue, Series B Aaa/AAA 430,313
7.20%, 12/01/00 BIGI Insured
400,000 Denver City & County School District
#1, COP Aaa/AAA 424,500
6.80%, 12/15/98, FGIC Insured
1,200,000 Denver City & County School District
Lease Purchase Agreement Aaa/AAA 1,273,500
6.85%, 12/15/99, FGIC Insured
1,000,000 Denver City & County School District
#1, COP Aaa/AAA 1,111,250
6.95%, 12/15/00, FGIC Insured
5,489,282
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF INVESTMENTS
RATING
FACE MOODYS/
AMOUNT REVENUE BONDS (CONTINUED) S&P VALUE
<C> <S> <C> <C>
Miscellaneous Revenue (1.0%)
$ 1,000,000 Boulder County, CO, N.C.A.R. NR/A $ 1,105,000
6.50%, 12/01/02
1,000,000 Boulder County, CO, N.C.A.R. NR/A 1,105,000
6.60%, 12/01/03
2,210,000
Total Revenue Bonds 136,516,504
Total Investments - 98.8%
(Cost $205,402,606*) 216,865,160
Other assets in excess of
liabilities - 1.2% 2,440,647
Net Assets - 100% $ 219,305,807
<FN>
* Cost for Federal tax purposes is $204,804,319.
</FN>
</TABLE>
See accompanying notes to financial statements.
20
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<S> <C>
ASSETS
Investments at value (identified cost $205,402,606) $ 216,865,160
Cash 368,733
Interest receivable 2,129,901
Receivable for Fund shares sold 532,709
Receivable for investment securities sold 35,155
Other assets 1,779
Total assets 219,933,437
LIABILITIES
Payable for Fund shares redeemed 330,450
Dividends payable 122,228
Accrued expenses 79,615
Adviser and Administrator fees payable 68,242
Distribution fees payable 27,095
Total liabilities 627,630
NET ASSETS (equivalent to $10.56 per share on
20,757,916 shares outstanding) $ 219,305,807
Net Assets consist of:
Capital Stock - Authorized an unlimited number of
shares, par value $.01 per share $ 207,579
Additional paid-in capital 208,302,093
Accumulated net loss on investments (666,419)
Net unrealized appreciation on investments 11,462,554
$ 219,305,807
Net Asset Value, redemption price per share $ 10.56
Offering price per share (100/96 of $10.56 adjusted
to nearest cent) $ 11.00
</TABLE>
See accompanying notes to financial statements.
21
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
<S> <C> <C>
INVESTMENT INCOME:
Interest income $ 12,456,131
Expenses:
Investment Adviser fees (note B) $ 427,046
Administrator fees (note B) 640,488
Transfer and shareholder servicing agent fees 178,022
Distribution fees (note B) 106,748
Legal fees 66,040
Trustees fees and expenses (note G) 60,783
Shareholders reports and proxy statements 48,114
Audit and accounting fees 26,293
Custodian fees (note F) 22,679
Registration fees and dues 16,663
Insurance 4,570
Miscellaneous 41,374
1,638,820
Investment Advisory fees waived (note B) (49,985)
Administration fees waived (note B) (228,480)
Expenses paid indirectly (note F) (22,254)
Net expenses 1,338,101
Net investment income 11,118,030
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss from securities transactions (610,206)
Change in unrealized appreciation on investments 15,943,831
Net realized and unrealized gain on investments 15,333,625
Net increase in net assets resulting from
operations $ 26,451,655
</TABLE>
See accompanying notes to financial statements.
22
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
STATEMENTS OF CHANGES IN NET ASSETS
Year Ended December 31,
1995 1994
<S> <C> <C>
OPERATIONS:
Net investment income $ 11,118,030 $ 11,384,283
Net realized loss from securities transactions (610,206) (157,767)
Change in unrealized appreciation (depreciation)
on investments 15,943,831 (19,868,869)
Net increase (decrease) in net assets resulting
from operations 26,451,655 (8,642,353)
DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income ($0.54 and $0.55 per
share, respectively) (11,118,030) (11,384,283)
Net realized gain on investments _ _
Total distributions (11,118,030) (11,384,283)
Net increase (decrease) from investment
activities 15,333,625 (20,026,636)
<CAPTION>
FUND SHARE TRANSACTIONS:
SHARES
Year Ended December 31,
1995 1994
<S> <C> <C> <C> <C>
Shares sold 1,989,814 2,742,010 20,448,079 28,178,675
Shares issued through
reinvestment of dividends 647,189 652,742 6,682,125 6,627,653
Shares redeemed (2,154,129) (3,765,296) (22,233,430) (37,981,459)
Increase (decrease) in
shares and net assets
derived from Fund
share transactions 482,874 (370,544) 4,896,774 (3,175,131)
Total increase (decrease)
in net assets 20,230,399 (23,201,767)
NET ASSETS:
Beginning of year 199,075,408 222,277,175
End of year $219,305,807 $ 199,075,408
</TABLE>
See accompanying notes to financial statements.
23
<PAGE>
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Tax-Free Fund of Colorado (the "Fund"), a non-diversified, open-end
investment company, was organized in February, 1987 as a Massachusetts
business trust and commenced operations on May 21, 1987. The Fund is
authorized to issue an unlimited number of shares and, since its inception,
has issued only one class of shares, to which these financial statements
relate. It is anticipated that the Fund will begin offering two additional
classes of shares during the second calendar quarter of 1996. The shares
outstanding at that time will be designated as Class A shares and, as is the
case now, will be sold with a front-end sales charge and bear a service fee.
Class C shares will be sold with no front-end sales charge but will be
assessed a contingent deferred sales charge if redeemed within 18 months
from the time of purchase and a level charge for service and distribution
fees. Class Y shares will be offered only to institutions acting for
investors in a fiduciary, advisory, agency custodial or similar capacity,
and will not be offered directly to retail customers, and will be sold at net
asset value with no sales charge, no redemption fee, no contingent deferred
sales charge and no service or distribution fees. All classes of shares will
have identical rights and privilges except with respect to the effect of
sales charges, the distribution and/or service fees borne by each class,
expenses specific to each class, voting rights on matters affecting a single
class and the exchange privilege of each class.
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles for investment
companies.
(1) Portfolio valuation: Municipal securities which have remaining
maturities of more than 60 days are valued each business day based upon
information provided by a nationally prominent independent pricing
service and periodically verified through other pricing services; in the
case of securities for which market quotations are readily available,
securities are valued at the mean of bid and asked quotations and, in
the case of other securities, at fair value determined under procedures
established by and under the general supervision of the Board of
Trustees. Securities which mature in 60 days or less are valued at
amortized cost if their term to maturity at purchase was 60 days or
less, or by amortizing their unrealized appreciation or depreciation on
the 61st day prior to maturity, if their term to maturity at purchase
exceeded 60 days.
(2) Securities transactions and related investment income: Securities
transactions are recorded on the trade date. Realized gains and losses
from securities transactions are reported on the identified cost basis.
Interest income is recorded daily on the accrual basis and is adjusted
for amortization of premiums and accretion of discounts of securities
purchased at other than par with less than 60 days to maturity.
(3) Federal income taxes: It is the policy of the Fund to qualify as a
regulated investment company by complying with the provisions of the
Internal Revenue Code applicable to certain investment companies. The
Fund intends to make distributions of income and securities profits
sufficient to relieve it from all, or substantially all, Federal income
and excise taxes.
24
<PAGE>
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS (continued)
(4) Use of estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of increases and decreases in net assets from
operations during the reporting period. Actual results could differ
from those estimates.
NOTE B - MANAGEMENT ARRANGEMENTS AND FEES AND OTHER TRANSACTIONS WITH
AFFILIATES:
Management affairs of the Fund are conducted through two separate
management arrangements.
KPM Investment Management, Inc. (the "Adviser") became Investment Adviser
to the Fund effective July 1, 1994. (Kirpatrick, Pettis, Smith, Polian Inc.,
of which the Adviser is a wholly-owned subsidiary, was the predecessor
Investment Adviser beginning October 1, 1992.) In this role, under an
Investment Advisory Agreement, the Adviser supervises the Fund's investments
and provides various services to the Fund for which it is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.20 of 1% of the net assets of the Fund up to $250
million and 0.16% of the net assets above $250 million.
The Fund also has an Administration Agreement with Aquila Management
Corporation (the "Administrator"), the Fund's founder and sponsor. Under this
Agreement, the Administrator provides all administrative services, other than
those relating to the management of the Fund's investments. This includes
providing the office of the Fund and all related services as well as
overseeing the activities of all the various support organizations to the
Fund such as the shareholder servicing agent, custodian, legal counsel,
auditors and distributor and additionally maintaining the Fund's accounting
books and records. For its services, the Administrator is entitled to receive
a fee which is payable monthly and computed as of the close of business each
day at the annual rate of 0.30 of 1% of the net assets of the Fund up to $250
million and 0.24% of the net assets above $250 million.
Specific details as to the nature and extent of the services provided by
the Adviser and the Administrator are more fully defined in the Fund's
Prospectus and Statement of Additional Information.
The Adviser and the Administrator each agrees that the above fees shall
be reduced, but not below zero, by an amount equal to its pro-rata portion
(determined on the basis of the respective fees computed as described above)
of the amount, if any, by which the total expenses of the Fund in any fiscal
year, exclusive of taxes, interest and brokerage fees, shall exceed the
lesser of (i) 2.5% of the first $30 million of average annual net assets of
the Fund plus 2% of the next $70 million of such assets and 1.5% of its
average annual net assets in excess of $100 million, or (ii) 25% of the Fund's
total annual investment income. No such reduction in fees was required during
the year ended December 31, 1995.
For the year ended December 31, 1995, the Fund incurred fees under the
Advisory Agreement and Administration Agreement of $427,046 and $640,488,
respectively, of which amounts the Adviser and Administrator voluntarily
waived $49,985 and $228,480, respectively.
Under a Distribution Agreement, Aquila Distributors, Inc. (the
"Distributor") serves as the exclusive distributor of the Fund's shares.
Through agreements between the Distributor and various broker-dealer firms
("dealers"), the Fund's shares are sold primarily through the facilities of
these dealers having
25
<PAGE>
TAX-FREE FUND OF COLORADO
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
offices within Colorado, with the bulk of sales commissions inuring to such
dealers. However, for the year ended December 31, 1995, the Distributor
received sales commissions in the amount of $105,085.
Effective June 8, 1994 the Fund adopted a Distribution Plan (the "Plan")
pursuant to Rule 12b-1 (the "Rule") under the Investment Company Act of 1940.
The Plan authorizes the Fund to make service fee payments to broker-dealers
or others selected by the Distributor, including, but not limited to, any
principal underwriter of the Fund, with which the Distributor has entered
into written agreements contemplated by the Rule and which have rendered
assistance in the distribution and/or retention of the Fund's shares or
servicing of shareholder accounts. On July 1, 1994, the Fund commenced
payment of this service fee at the annual rate of 0.05% of the Fund's average
net assets. This rate is paid on average net assets up to $250 million and,
on average net assets in excess of that amount, the payment will be made at
the annual rate of 0.15%, with a simultaneous reduction in each of the
Investment Advisory fee and the Administration fee paid on net assets above
$250 million from an annual rate of 0.20% and 0.30%, respectively, to 0.16%
and 0.24%, respectively. At the Annual Meeting of the Shareholders of the
Fund held on June 7, 1995, shareholders approved an amendment to the Fund's
Distribution Plan which eliminates the $250 million breakpoint and permits
the Fund to make service fee payments at the rate of 0.15 of 1% on its entire
net assets. However, there will be a simultaneous reduction in the fee
payable to the Adviser from an annual rate of 0.20 of 1% to 0.16% and in the
fee payable to the Administrator from an annual rate of 0.30 of 1% to 0.24%
on all net assets; these fee reductions will offset the increase in the rate
of the service fee and will result in no increase in overall expenses of the
Fund. These new fee arrangements will go into effect on the earlier of
October 1, 1996 or the first day of the next succeeding calendar quarter
after the quarter in which the net assets of the Fund exceed $250 million,
which as of December 31, 1995 had not occurred. During the year ended
December 31, 1995, service fees amounted to $106,748, of which the
Distributor received $2,553. Specific details about the Plan are more fully
defined in the Fund's Prospectus and Statement of Additional Information.
NOTE C - PURCHASES AND SALES OF SECURITIES:
During the year ended December 31, 1995, purchases of securities and
proceeds from the sales of securities aggregated $33,408,133 and $29,667,292,
respectively.
At December 31, 1995, aggregate gross unrealized appreciation for all
securities in which there is an excess of market value over tax cost amounted
to $12,092,387 and aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over market value amounted to $31,546
for a net unrealized appreciation of $12,060,841. At December 31, 1995, the
Fund has a capital loss carryover of approximately $666,419 which is
available to offset future net realized gains on securities transactions to
the extent provided for in the Internal Revenue Code. Of this amount,
$125,536 expires at December 31, 2002 and the balance of $540,883 expires at
December 31, 2003. To the extent that this loss is used to offset future
realized capital gains, it is probable the gains so offset will not be
distributed.
NOTE D - PORTFOLIO ORIENTATION:
Since the Fund invests principally and may invest entirely in double
tax-free municipal obligations of issuers within Colorado, it is subject to
possible risks associated with economic, political, or legal developments or
industrial or regional matters specifically affecting Colorado and whatever
effects these may have upon Colorado issuers ability to meet their
obligations.
26
<PAGE>
NOTE E - DISTRIBUTIONS:
The Fund declares dividends daily from net investment income and makes
payments monthly in additional shares at the net asset value per share or in
cash, at the shareholder's option. Net realized capital gains, if any, are
distributed annually.
The Fund intends to maintain, to the maximum extent possible, the
tax-exempt status of interest payments received from portfolio municipal
securities in order to allow dividends paid to shareholders from net
investment income to be exempt from regular Federal and State of Colorado
income taxes. However, due to differences between financial reporting and
Federal income tax reporting requirements, distributions made by the Fund may
not be the same as the Fund's net investment income, and/or net realized
securities gains. Further, a small portion of the dividends may, under some
circumstances, be subject to ordinary income taxes. Also, annual capital
gains distributions, if any, are taxable.
NOTE F - CUSTODIAN FEES:
The Fund has negotiated an expense offset arrangement with its custodian
wherein it receives credit toward the reduction of custodian fees whenever
there are uninvested cash balances. During the year ended December 31, 1995,
the Fund's custodian fees amounted to $22,679, of which $22,254 was offset by
such credits. The Fund could have invested its cash balances in an
income-producing asset if it had not agreed to a reduction in fees under the
expense offset arrangement with the custodian.
NOTE G - TRUSTEES' FEES AND EXPENSES:
During the fiscal year from January 1, 1995 through December 31, 1995,
there were six Trustees for the first eight months and seven Trustees
thereafter. Trustees' fees paid during the year were at the annual rate of
$5,000 for carrying out their responsibilities and attendance at regularly
scheduled Board Meetings. If additional or special meetings are scheduled for
the Fund, separate meeting fees are paid for each such meeting to those
Trustees in attendance. The Fund also reimburses Trustees for expenses such
as travel, accomodations, and meals incurred in connection with attendance at
regularly scheduled or special Board Meetings and at the Annual Meeting and
outreach meetings of Shareholders. For the fiscal year ended December 31,
1995, such reimbursements averaged approximately $5,500 per Trustee for those
Trustees serving throughout the Fund's entire fiscal year. One of the
Trustees, who is affiliated with the Administrator, is not paid any Trustee
fees.
FEDERAL TAX STATUS OF 1995 DISTRIBUTIONS (UNAUDITED)
For the fiscal year ended December 31, 1995, of the total amount of
dividends paid by Tax-Free Fund of Colorado, 98.00% was exempt-interest
dividends and the balance was ordinary dividend income.
Prior to January 31, 1996, shareholders were mailed IRS Form 1099-DIV
which contained information on the status of distributions paid for the 1995
CALENDAR YEAR.
27
<PAGE>
<TABLE>
<CAPTION>
TAX-FREE FUND OF COLORADO
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year
Year ended December 31,
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
Net Asset Value, Beginning
of Year $9.82 $10.77 $10.38 $10.18 $9.77
Income from Investment
Operations:
Net investment income 0.54 0.55 0.57 0.61 0.62
Net gain (loss) on
securities (both
realized and unrealized) 0.74 (0.95) 0.55 0.28 0.41
Total from Investment
Operations 1.28 (0.40) 1.12 0.89 1.03
Less Distributions:
Dividends from net
investment income (0.54) (0.55) (0.57) (0.61) (0.62)
Distributions from
capital gains - - (0.16) (0.08) -
Total Distributions (0.54) (0.55) (0.73) (0.69) (0.62)
Net Asset Value, End of
Year $10.56 $9.82 $10.77 $10.38 $10.18
Total Return (not
reflecting sales load) 13.28% (3.80)% 11.10% 9.00% 10.96%
Ratios/Supplemental Data
Net Assets, End of Year
(in thousands) $219,306 $199,075 $222,277 $174,031 $129,760
Ratio of Expenses to
Average Net Assets 0.63% 0.57% 0.53% 0.45% 0.43%
Ratio of Net Investment
Income to Average Net
Assets 5.21% 5.36% 5.32% 5.90% 6.25%
Portfolio Turnover Rate 14.20% 15.53% 20.89% 25.88% 25.47%
<CAPTION>
Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary
waiver of fees, the Administrator's voluntary expense reimbursement and the
expense offset in custodian fees for uninvested cash
balances would have been:
<S> <C> <C> <C> <C> <C>
Net Investment Income $0.52 $0.53 $0.55 $0.59 $0.58
Ratio of Expenses to
Average Net Assets 0.77% 0.76% 0.73% 0.70% 0.80%
Ratio of Net Investment
Income to Average Net
Assets 5.07% 5.17% 5.12% 5.65% 5.88%
</TABLE>
Note: On April 19, 1991, Norwest Bank Denver, National Association (formerly
United Bank of Denver National Association), originally the Fund's Investment
Adviser, became Sub-Adviser and Norwest Bank Minnesota, National Association
became Investment Adviser upon completion of a merger with Norwest
Corporation. On October 1, 1992, Kirkpatrick, Pettis, Smith, Polian Inc.
became the Fund's Investment Adviser. On July 1, 1994, KPM Investment
Management, Inc. the wholly-owned subsidiary of Kirkpatrick, Pettis, Smith,
Polian Inc., became the Fund's Investment Adviser.
See accompanying notes to financial statements
28
<PAGE>
REPORT ON THE ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
The Annual Meeting of Shareholders of the Fund was held on June 7,
1995. At the meeting, the following matters were submitted to a shareholder
vote* and approved:
(i) the election of Lacy B. Herrmann, Tucker Hart Adams, Arthur K. Carlson,
William M. Cole, Anne J. Mills and John G. Welles as Trustees to hold
office until the next annual meeting of the Fund's shareholders or
until his or her successor is duly elected (each Trustee received at
least 12,612,715 affirmative votes (97.9%); no more than 271,274 votes
were withheld for any Trustee (2.1%)),
(ii) the ratification of the selection of KPMG Peat Marwick LLP as the
Fund's independent auditors for the fiscal year ending December 31,
1995 (votes for: 12,332,231 (95.7%); votes against: 90,196 (0.7%);
abstentions: 452,771 (3.5%); broker non-votes: 7,788 (0.1%)),
(iii) the approval of a new (amended and restated) Investment Advisory
Agreement for the Fund (votes for: 11,850,593 (92.0%); votes against:
280,350 (2.2%); abstentions: 745,014 (5.8%); broker non-votes: 7,792
(0.1%)),
(iv) the approval of an amendment to the Distribution Plan of the Fund
(votes for: 9,926,832 (77.0%); votes against: 328,332 (2.5%);
abstentions: 812,797 (6.3%); broker non-votes: 1,816,028 (14.1%)), and
(v) the approval of an amendment to the Declaration of Trust of the Fund to
authorize the creation of classes of shares (votes for: 11,692,111
(90.7%); votes against: 357,627 (2.8%); abstentions: 826,459 (6.4%);
broker non-votes: 7,792 (0.1%)).
___________
* On the record date for this meeting, 20,546,860 shares of the Fund were
outstanding and entitled to vote. The holders of 12,883,989 shares (62.7%)
entitled to vote were present in person or by proxy at the meeting.
29
<PAGE>
INVESTMENT ADVISER
KPM INVESTMENT MANAGEMENT, INC.
1700 Lincoln Street, Suite 1300
Denver, Colorado 80203
ADMINISTRATOR AND FOUNDER
AQUILA MANAGEMENT CORPORATION
380 Madison Avenue, Suite 2300
New York, New York 10017
BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Tucker Hart Adams
Arthur K. Carlson
William M. Cole
Anne J. Mills
J. William Weeks
John G. Welles
OFFICERS
Lacy B. Herrmann, President
W. Dennis Cheroutes, Senior Vice President
Marie Aro, Vice President
Jean M. Smith, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary
DISTRIBUTOR
AQUILA DISTRIBUTORS, INC.
380 Madison Avenue, Suite 2300
New York, New York 10017
CUSTODIAN
BANK ONE TRUST COMPANY, N.A.
100 East Broad Street
Columbus, Ohio 43271
TRANSFER AND SHAREHOLDER SERVICING AGENT
ADMINISTRATIVE DATA
MANAGEMENT CORP.
581 Main Street
Woodbridge, New Jersey 07095-1198
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
345 Park Avenue
New York, New York 10154
Further information is contained in the Prospectus,
which must precede or accompany this report.
ANNUAL
REPORT
DECEMBER 31, 1995
Aquila
(picture of eagle)
TAX-FREE FUND
OF
COLORADO
A tax-free income investment
<LOGO>
One of the
AQUILA(sm) Group of Fund's
